Is It Just Me, Or Was That A Nightmare?

You know, I don’t do a lot of “that’s a wrap” or “the day that was” posts.

For one thing 4:30 is beach time (and usually just the right beach weather) and for another, the last thing I want to do after staring at 3 monitors for damn near 12 hours is make a bunch of charts in a hurry. That’s a real pain and besides, all it takes is one last minute vol crush to antiquate your whole chart collage (as one of my former colleagues would undoubtedly attest to).

But I can’t help wanting to mention that from where I’m sitting Tuesday looked like a complete sh*t show.

It was pretty clear from the word “go” that it was going to be a nerve-fraying romp, what with Theresa May’s 6 a.m. tape bomb and Goldman’s FICC fumble. But the wheels seemed to really come off (in terms of sanity) at 1:47 when some kind of nightmarish stop-run/liquidity-less/short squeeze came calling in cable, promptly sending the dollar careening lower.

Dollar

And that was set against the backdrop of Goldman throwing in the towel on their long dollar reco, which I can only imagine made things worse.

Of course that had a knock-on effect for Treasury yields which hit post-election lows pretty much across the fucking curve.

I guess I’m not entirely sure whether it’s me making it out to be worse than it actually was or the punditry refusing to acknowledge what we just watched, but I do believe that the following assessment out Tuesday afternoon from Bloomberg seems to support my contention that this likely doesn’t presage anything good where “good” means “reflationary”…

Via Bloomberg

The dollar has resumed the downward trajectory it established at the start of 2017, and the depth of the next leg lower will likely surprise the remaining bulls.

If you believe, like many, that the U.S. currency moves in sync with real yields and Treasuries, then you should expect the greenback to fall an additional 4% in coming weeks

Fixed-income traders have taken back most of the Fed’s two quarter-point rate hikes since mid-December, sending 10-year yields lower by around 40 basis points

The dollar, on the other hand, has adjusted by less than half that amount, in part because of European political risks; catching up with the yield move may drive the greenback as low about 104 yen, from about 108.40 now

One arrives at that conclusion through a back-of-the- envelope calculation traders use to translate a quarter- point easing or tightening into a change in the dollar’s trade-weighted index

The Fed’s broad measure of the trade-weighted dollar has dropped almost 4% since the Fed hike in December; a 4% move for FX traders equates to an easing of 25 basis points, so a take-back of just one of the Fed’s hikes

That leaves FX traders with potentially an additional 4% to go to catch up to their fixed-income counterparts

Dollar bulls might plead for traders to hang on and wait for 10-year yields to rebound, supporting the dollar and balancing the pricing between rates and FX traders; inflation expectations argue against that approach

The one-year TIPS rate five years forward, a measure of inflation expectations, has fallen to the lowest since January, taking yields with it; if these expectations keep easing, yields will remain depressed, leaving the dollar in a position of having to catch up

The trend suggests USD bulls should prepare for dark days ahead come